Sunday, November 18, 2007

Lots of Ways To Skin a Cat

Almost every week I receive emails about the content of the Newsletter article and most of the time they are pretty friendly even when they don't agree with everything I have to say. Every once in a while, I receive a "Nastygram" as I did last week following the article about options. Here is what the dear fellow (whose name I have withheld) had to say:

"There is no academic evidence to show trading options will accumulate wealth...I have a feeling that the broker makes more cash than the trader. But show me. Give me an academic publication that proves your 'shucking and Jiving' really works. Our family has owned Citi-Corp [sic], yes that doggie since $14 a share....Just keep buying more in dividend reivestment [sic]. Let me write for your website and give traders a choice. And stop telling everyone how smart you are. after [sic] all you don't need our are already wealthy."

First, if I have given the impression that I have been telling everyone how smart I am, I apologize. That is definitely not my intent. I write the Newsletter articles to try and give readers the benefits of my many mistakes as well as years of study and trading for my living. I am not the publisher of the Newsletter and get no income whatsoever for writing these articles. I do not share in advertising income paid the publisher. I write the articles for three reasons: 1. to give back in repayment for my own good fortune, 2. in the hope that the articles will get people to educate themselves before throwing money into the markets for emotional reasons, and 3. to get the occasional free subscriber to try one of my paid services (Option Trader, Trend Trader, and $10 Trader).

It is interesting to note that the free subscriber who wrote the quoted email apparently does not even know what his family does own. He refers to Citi-Corp which no longer offers stock that exists under that name, but has long traded as Citigroup (C). I think his point is that his family are buy and hold investors and there is certainly a great deal to be said about buy and hold investing. Over the long haul much buy and hold investing has been very successful and I certainly am not opposed to that strategy. I must point out, however, that blindly buying and holding definitely does not assure success. Former holders of shares in Enron and Worldcom can certainly attest to the occasional failure of the strategy.

Options can have an important place for the buy and hold strategist as well. Buying protective puts, for example, can "insure" against price drops. Our friend's Citigroup (C) stock, for example, fell from $49 in mid-September to a low of $31.05 in November. A protective put might well have significantly softened that blow. Of course, his family just holds the stock so such dramatic falls may not phase the subscriber, but I'd wager he'd be even happier if that paper loss had been offset by a big profit in some puts.

I can only assume that my email pal has a large number of shares of C now so maybe it would be worth selling some out of the money covered calls against that position to bring in some monthly income. With the stock now back in the mid-30's as I write, the Dec 40 calls could bring in 45 cents a share. If he has 5000 shares, that could be $2,250 a month in income.

The point is that various options strategies can be helpful to almost any investor. Any strategy can be rewarding and any strategy can produce losses. Buy and hold can be an excellent strategy, but it also exposes the investor to the possibility of very large losses. Options can afford some protection against such losses. Knowledge and risk awareness are keys to successful investing. Our friend evidently is wed to a single strategy and there is nothing wrong with that as long as he understands the risks of the strategy and has the knowledge to manage those risks. My question to the buy and hold strategist is: Hold until when?

With regard to the subscriber's comments about academic publications, I confess I don't know what he means by my "shucking and jiving" but neither do I know of any academic publication that devotes itself to shucking or jiving. I do know that academia does recognize option trading. I also know that some of the wealthiest investors do make use of options as do successful brokerage firms.

As that fellow wrote, I don't need his money. He is absolutely right. I don't, but I would suggest that a little more education wouldn't hurt any of us -- him included. Of course, so there is no mistake, I am not taking his money. He is a free subscriber. I wonder why he bothers to read the Newsletter.

Bill Kraft, Editor
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